December 18th, 2023
Blockchain technology has demonstrated the potential to revolutionize how business operations are performed in various sectors. By moving asset tracking and code execution onto a public, decentralized digital ledger, operations become more transparent, resilient, and censorship-resistant.
One of the industries most impacted by the rise of blockchain technology is the financial sector, as demonstrated by the rapid growth in Decentralized Finance (DeFi) solutions. On-Chain Finance (OnFi) is another prime example of how blockchain technology is transforming the financial industry.
OnFi is when financial activities and transactions previously performed using traditional financial infrastructure are moved onto the blockchain. Asset ownership is tracked on the blockchain’s digital ledger, and smart contracts are used to execute various functions in a transparent and decentralized manner.
For example, traditional financial systems offer the ability to buy, sell, and trade various assets on financial markets. With OnFi, ownership of these assets is tracked on the blockchain, and the blockchain’s native token transfer functionality is used to implement these functions. This approach to modernizing financial infrastructure can provide a wide range of benefits to financial institutions and their customers.
Originally, tokens on the blockchain were designed to track ownership of digital assets. Bitcoin, Ether, and other cryptocurrencies recorded ownership of fungible, financial assets, while non-fungible tokens (NFTs) could be used to track ownership of digital images or other assets.
Over time, tokenization has expanded to include tracking ownership of real-world assets (RWAs). In theory, ownership of a tokenized asset confers full rights and privileges regarding its real-world counterpart. For example, deeds have traditionally been used to record ownership of property, and tokenization enables these deeds to be tracked and transferred as a digital token rather than a piece of paper.
Asset tokenization is a core principle of OnFi. Assets such as real estate, stocks, and commodities are tracked and traded on the blockchain using tokens and smart contracts. This enables these traditional financial activities to take advantage of the advantages of blockchain technology.
Smart contracts are a major enabler of OnFi. OnFi requires the ability to record and execute complex agreements on top of the blockchain.
Smart contracts make this possible in a way that is more transparent, decentralized, and censorship-resistant than traditional financial operations. Instead of relying on a traditional financial institution like a bank to perform transactions, OnFi encodes the required functionality within smart contracts.
These smart contracts are executed on top of the blockchain’s distributed and decentralized network and can automatically enforce the terms of the agreements. Since the terms of the agreements are implemented as code and asset ownership is tracked using tokens, transfers and other operations can be performed upon request or automatically when certain conditions are met.
OnFi is designed to leverage the benefits of blockchain technology to modernize and streamline traditional financial operations. Some of the benefits that OnFi provides to users include the following:
Transparency and Traceability: Most blockchains are designed to implement a decentralized and publicly visible digital ledger. Transactions performed on the blockchain — including the transfers and agreements that lie at the heart of OnFi — can be viewed by anyone, increasing the transparency, traceability, and auditability of financial operations.
Rapid Settlement: Most blockchains have rapid settlement times, enabling a transaction to be recorded on the immutable digital ledger very quickly. Often, these settlement times are faster than traditional financial systems, enabling faster trading and other financial operations.
Reduced Operational Costs: Blockchains are maintained by the blockchain network, and the fees for running smart contracts and executing transactions are typically minimal. This helps to decrease overhead when compared to maintaining and operating the infrastructure used by traditional financial operations.
Eliminating Intermediaries: Often, financial operations involve intermediaries that can slow down processes and increase fees. Blockchain technology eliminates the need for these intermediaries as any two parties can interact directly or via a blockchain-based smart contract.
Greater Resiliency: Traditional financial institutions rely on centralized infrastructure, which, on several occasions, has resulted in service outages as critical components of their infrastructure are rendered unavailable. OnFi moves these functions onto the blockchain, which relies on a decentralized network of nodes to store transaction data and execute smart contract code. Since no node in the network is essential to its operation, blockchain-based OnFi solutions can offer a greater degree of resilience and reliability than their traditional counterparts.
Improved Accessibility: Opportunities in the traditional financial sector can be inaccessible to unbanked and underbanked populations. Blockchains are designed to be globally accessible to anyone, increasing potential access to financial services.
Additional Asset Classes: In traditional financial systems, some assets are considered illiquid or alternative, making them more difficult to manage and invest. Tokenization of real-world assets can provide access and exposure to a wider range of potential assets, which can open up new opportunities and provide additional options for risk management.
Greater Security: OnFi relies on smart contracts and cryptographic algorithms rather than the private programs and processes of a financial institution. This offers stronger security guarantees to users of blockchain-based OnFi services.
On-chain finance implements many of the same functions and capabilities that exist in traditional financial infrastructure. Users have the ability to buy, sell, and trade assets and other commodities.
However, OnFi differs from traditional finance in its use of modern, blockchain-based technology. By moving from reliance on a centralized financial institution to the decentralized blockchain, OnFi offers a range of benefits to its users, including improved transparency, accessibility, and resiliency.
OnFi systems have the potential to revolutionize the financial sector and hold large amounts of value on-chain. As a result, it’s essential that these systems be designed and implemented securely to protect users and their assets against potential cyber threats.
Halborn has extensive experience in both checking smart contracts for vulnerabilities and validating business logic to identify errors that could open up these systems to potential exploitation. For more information about how Halborn can help with designing, securing, and auditing OnFi projects, get in touch.